quiz7a

quiz7a - Principles of Economics EC 1 UCLA Dr. Bresnock...

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Principles of Economics EC 1 UCLA Dr. Bresnock Quiz 7 Answers Choose the best answer to each question and mark it on your answer form. 1. When total utility is at a maximum, marginal utility is: A) rising. B) at its average value. C) at a maximum. D) zero. A) is incorrect because the marginal utility is the slope of the total utility function. If the total utility is at its maximum, the slope is zero. B) is incorrect because the average utility would be calculated as the total utility divided by the number of units consumed. The marginal utility is the change in total utility divided by the change in the number of units consumed. C) is incorrect, see (A). D) is correct, see (A). Also note that the marginal utility is the first derivative of the total utility function. 2. Tom is trying to decide how to allocate his $50 budget for CD purchases and DVD rentals when the price of a CD is $10 and the price of a DVD rental is $5. Which of the following combinations of CD purchases and DVD rentals lie outside Tom's budget? (Tom cannot afford this combination.) A) 5 CDs and 10 DVDs B) 5 CDs and 0 DVDs C) 0 CDs and 5 DVDs D) 2 CDs and 5 DVDs A) is correct because this combination exceeds his budget of $50. The 5 CDs at $10 each would cost him $50. The 10 DVDs at $5 each would also cost him $50. The combination of both these items would cost $100, which exceeds his budget of $50. B) is incorrect because 5 CDs and 0 DVDs would cost him $50 which does not exceed his budget. C) is incorrect because 0 CDs and 5DVDs would cost him $25 which does not exceed his budget. D) is incorrect because the 2 CDs at $10 each will cost him $20. The 5 DVDs at $5 each will cost him $25. The combination of these items would cost him $45, which does not exceed his budget. 3. If the price of a good falls and the consumer decides to buy more of the good solely because it is relatively less expensive, this describes the: A) income effect. B) substitution effect. Page 1
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C) consumer surplus effect. D) marginal-maximizing rule. A) is incorrect because the income effect is how much a person can afford to purchase with a given budget, or money income, as a result of the price change. B) is correct because the substitution effect is due to a relative change in price. When price of other substitute goods are unchanged, and the price of this good falls, it is relatively less expensive, and the consumer purchases more of it. C) is incorrect the presence of consumer surplus does not change a consumer’s behavior. Consumer surplus is the benefit, in dollars, a consumer receives from buying a good at a price lower than the maximum they would be willing to pay. If the price were to fall, consumer surplus would increase, but this increase would not cause the consumer to purchase more of the good. D) is incorrect because the marginal-maximizing rule applies to the utility or satisfaction
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quiz7a - Principles of Economics EC 1 UCLA Dr. Bresnock...

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